Risk appetite in Africa’s copper hotspot Zambia is clawing back as political risks continue to subside and the authorities take very aggressive steps to restore fiscal fitness in engagements with the Washington based lender, the International Monetary Fund. This pattern is vividly evident in the appetite skew for government securities as players are now more confident in housing liquidity in much more longer dated tenors (>3yrs) than a year ago. In the second government securities bond sale held on February 18, the Bank of Zambia (BOZ) recorded strong demand for Kwacha bonds in the medium to long term tenors signaling stronger investor confidence in the outlook of the Southern African nations economy.
EXCESS BOND DEMAND CAPPED AT MENISCUS
BOZ successfully absorbed K2.6 billion of the K4.5 billion bids with the curve unchanged (save the 3yr that ebbed 50bps to 20.5%) and the highest interest concentrated in the 5 and 10 year tenors whose yields paid 22.25% and 25.49% respectively. This debt sale comes two days after the debut interest rate decision meeting of the year 2022 that kept rates unchanged at 9.0% on the back of an easing inflation trajectory while the central bank remained wary of upside risks to consumer price index in the external economy to include those from energy price risks as crude prices soar while electricity tariffs remain on the brink of upward adjustment as part of a subsidy removal initiative.
CERTAIN ‘UNCERTAINTY’ SHAPING BEARISH RATE OUTLOOK
The markets seem to be shaped by actions and expectations that are certain but the ‘uncertainty’ around their actualization further creates jitteriness skewing rates towards bears. The second fixed income auction is one that was keenly observed by players to signal the interest rate direction in light of the following factors: yield curve trajectory over the last 10 – 12 weeks with a climb across the short and long end, Zambia’s budgetary funding needs (endogenous) and above all the exogenous factors such as likely rate hikes from the US Fed to curb excessive inflation which could shift offshore appetite for emerging market paper back to the west that will now be more attractive as interest rates rise.
Real yields remain positive as premiums (for taking sovereign risk) above falling inflation arguably in the medium term, remain wide making government paper attractive to local players. With Zambia still in the labyrinth of a debt restructure and taking strides towards closing an (IMF) deal, offshore investors still have a positive outlook for the copper producer and as such will likely take long positions while the risks still weigh on the uncertainty around when the Extended Credit Facility (ECF) deal will be inked. Until then, markets will remain nervous through foreign currency volatility and uncertainty in interest rate outlook.
It is unlikely that new money will house in government securities given the commencement of the rate hiking cycle in the west to reign in on inflation. Offshores will be split between rolling over maturities and repatriating proceeds to invest in US treasuries which could be a pressure point for the Kwacha. Upside risks to currency are expected to persist in the medium term as global fundamentals continue to evolve.
The Kwacha Arbitrageur